Call to apply the brakes on negative gearing

A senior
ANZ Banking Group
executive has called for limits on tax breaks for investment property, warning negative gearing was fuelling a housing affordability crisis that was preventing ordinary people from buying their own home.

ANZ chief executive of Australia
Phil Chronican
has also urged authorities to release more land for new housing and accused governments of being addicted to taxes linked to high property prices.

In a speech in Sydney yesterday, Mr Chronican forecast the Reserve Bank would raise interest rates by 1 percentage point over the next 15 months, making it even harder for Australians to afford their own home.

“Interest rates have risen . . . but we still have [home] prices that in a historical sense are high and they are having an impact on affordability," he said in the address to the American Chamber of Commerce in Australia.

The latest Australian Bureau of Statistics figures show home prices dropped by an average 2.1 per cent in the March quarter, fostering concerns that the country’s property bubble was about to burst.

House prices have more than doubled in the past decade, leading the Economist magazine to declare that Australia had the most overvalued property market in the world.

Mr Chronican said the recent softness in the property market would persist as interest rates went up.

But he said home prices were still too high, blaming a shortage of new housing and tax breaks for real estate investors.

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He also took aim at government policies such as the first-home owner’s grant, saying they had exactly “the wrong impact" by pushing up property prices.

“The weakness in prices that we have seen in the past few months is going to continue for a while yet,"Mr Chronican said.

“If interest rates continue to rise and the price of other essential services rise, we are likely to be in for a sustained period of low house price growth, largely as a function of affordability.

“Demand is strong but affordability has reached its limits. But that latent demand will be ready to pounce if prices come back to more reasonable levels."

According to research by ANZ, Australia has a shortage of 230,000 dwellings, putting upward pressure on home prices and reducing affordability.

This year alone, 20,000 fewer homes would be built than were needed to satisfy demand, the ANZ research showed.

Mr Chronican said federal, state and local governments needed to take more responsibility for increasing the supply of housing by releasing land for development on the outskirts of major centres and promoting higher density living in inner-city areas.

But he warned governments might be too “conflicted" to take the necessary steps to make housing more affordable because it would lead to lower revenue from stamp duties and capital gains taxes, which rise alongside property prices.

“There is a risk here that government may be somewhat conflicted in making changes that might achieve more . . . affordable outcomes," he said.

In a blow to property investors, Mr Chronican said negative gearing was leading to an irrational “obsession" with buying real estate for the tax benefits, making it more expensive for people to buy homes to live in.

He did not call for tax breaks to be abolished but said “some limits on negative gearing may be required" to make people think twice about investing in property.

The Henry tax review recommended winding back negative gearing concessions last year, but stopped short of calling for them to be scrapped. Treasurer Wayne Swan ruled out the idea at that time.

“Governments might want to look at whether the current extent of tax breaks are fostering an unhealthy focus on housing as an investment and thereby compounding affordability issues," Mr Chronican said.

Meanwhile, the banks were keeping a close eye on the growing number of home owners that were missing mortgage payments, he said, after a report by Fitch Ratings showed the number of people that were behind had spiked to a record in the first three months of the year.

“I think that it is a problem that is going to stay with us for a while," he said.

“I don’t know if it is going to get worse or not. What we have seen is that housing interest rates have gone up and the cost of living on a lot of other fronts have gone up in areas such as food and fuel.

“So, it is understandable that households that are a little bit stretched would find it difficult.

“And on top of that we have the flood impact, which has had a particular influence in Queensland, where the rise [in mortgage arrears] has been the most pronounced."